New headache for Rachel Reeves as OBR expected to downgrade productivity forecast

"The Office for Budget Responsibility is expected to downgrade its key productivity forecast, the Guardian understands, setting Rachel Reeves on course to break her fiscal rules without significant action in the budget. The government's independent watchdog has carried out a stocktake of its forecast models over the summer, and Treasury officials privately acknowledge the result will inevitably be a weaker growth outlook."

"The consultancy Oxford Economics, however, estimates that moving the OBR's productivity forecast back in line with the less optimistic independent average projection would knock 1.4% off GDP at the end of its five-year forecast period. That would force Reeves to increase taxes or cut spending by an eye-watering 20bn to meet her fiscal rules and maintain her slim 10bn of headroom, roughly the equivalent of raising the main and higher rates of income tax by 2p."

"Treasury ministers hope to convince the OBR to score government policies such as planning reforms, which it hopes will boost growth, but these are likely to be more than outweighed by the productivity downgrade. When it assesses the chancellor's headroom against the fiscal rules, the OBR will also have to take into account the additional costs of recent political U-turns, including on the winter fuel allowance and botched welfare reforms."

The Office for Budget Responsibility is poised to lower its productivity forecast after a summer stocktake, producing a weaker growth outlook. Treasury officials expect a substantial single downward revision to productivity. Oxford Economics projects a 1.4% reduction in GDP by the end of the five-year forecast if the OBR adopts a less optimistic productivity path. That shortfall would require roughly 20bn of tax increases or spending cuts to satisfy fiscal rules and maintain a 10bn headroom, equivalent to about a 2p rise in main and higher income tax rates. Planning reforms and scored policies are unlikely to offset the downgrade, while costs from recent political U-turns add further pressure ahead of the 26 November budget.

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